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Exam 5: Corporations: Earnings Profits and Dividend Distributions

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Question 61

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Rose Corporation (a calendar year taxpayer) has taxable income of $300,000, and its financial records reflect the following for the year. ​ Rose Corporation's current E & P is:

A) $254,000.
B) $214,000.
C) $194,000.
D) $104,000.
E) None of the above.

F) A) and D)
G) C) and D)

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Question 62

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At the beginning of the current year, Paul and John each own 50% of Apple Corporation. In July, Paul sold his stock to Sarah for $110,000. At the beginning of the year, Apple Corporation had accumulated E & P of $200,000 and its current E & P is $250,000 (prior to any distributions). Apple distributed $260,000 on March 1 ($130,000 to Paul and $130,000 to John) and distributed another $260,000 on October 1 ($130,000 to Sarah and $130,000 to John). What are the tax implications of the $130,000 distribution to Sarah?

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As current E & P is allocated on a pro r...

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Question 63

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The rules used to determine the taxability of stock dividends also apply to distributions of stock rights.

Property distributed by a corporation as a dividend is subject to a liability in excess of its basis. For purposes of determining gain on the distribution, the basis of the property is treated as being not less than the amount of liability.

To determine E & P, some (but not all) previously excluded income items are added back to taxable income.

A realized gain from an involuntary conversion under § 1033 that is not recognized for income tax purposes has no effect on E & P.

In a property distribution, the amount of dividend income recognized by a shareholder is always reduced by the amount of liability assumed by a shareholder.

A corporate shareholder that receives a constructive dividend cannot apply a dividends received deduction to the distribution.

When computing E & P, taxable income is not adjusted for § 179 expense.

Stacey and Andrew each own one-half of the stock in Parakeet Corporation, a calendar year taxpayer. Cash distributions from Parakeet are: $350,000 to Stacey on April 1 and $150,000 to Andrew on May 1. If Parakeet's current E & P is $60,000, how much is allocated to Andrew's distribution?

When current E & P has a deficit and accumulated E & P is positive, the two accounts are netted at the date of the distribution. If a positive balance results, the distribution is a dividend to the extent of the balance.

Purple Corporation has accumulated E & P of $100,000 on January 1, 2015. In 2015, Purple has current E & P of $130,000 (before any distribution) . On December 31, 2015, the corporation distributes $250,000 to its sole shareholder, Cindy (an individual) . Purple Corporation's E & P as of January 1, 2016 is:

Briefly describe the reason a corporation might distribute a property dividend to a shareholder in lieu of a cash distribution. Describe the tax effects of the property distribution on the shareholder and on the corporation.

Using the legend provided, classify each statement accordingly. In all cases, assume that taxable income is being adjusted to arrive at current E & P for 2015 -Premiums paid on key employee life insurance policy (assume no increase in cash surrender value of policy) in 2015.